What is NFT Finance? Bringing the financial world into NFT

What is nft finance?

What is NFT Finance (NFTFi)?

NFT Finance is a combination of NFT and Decentralized Finance (DeFi), a term referring to the financial market for NFT. If tokens are applied in the DeFi market, NFT also has similar applications.

The characteristic of NFT is that it is non-fungible and cannot be divided into parts. Each NFT is created to represent a specific item, such as a work of art, a car, a house, etc. These are things that regular tokens cannot encode.

Therefore, if NFTs are used in the DeFi market, they will unlock many new features because they can take advantage of the advantages of NFTs compared to regular tokens. For example, buying and selling works of art and real estate encoded into NFTs.

The Development History of NFT Finance

The recent growth of NFT Finance must have stemmed from the user demand for NFTs. Here are some notable stages that mark the maturity of NFTs in the DeFi market:

  • In 2017: Some of the first NFT collectibles were born like CryptoPunks. However, the community did not pay attention and just kept them in wallets.
  • Until 2018-2019: NFT Collection projects or Dapps applying NFT started to appear more and more. This created the first NFT trading activities and was also the premise for the NFT Finance market.
nft development history
History of NFT development.
  • 2020-2022: NFT is widely applied when the Web3 Game and Metaverse trends develop strongly. At this time, a series of projects related to NFT Finance are also born and operate in many different fields such as trading, mortgage & lending…
  • 2023: NFT financial activities have created a vibrant market with the concept of NFT Finance but are still at the basic stage (with many problems) compared to the improvements that DeFi has achieved.

In the future, NFT Finance will continue to develop further as more and more projects are born, creating competition and promoting each other’s development.

Currently, the NFT Finance market still faces problems such as low liquidity and high price volatility, and that is the challenge for projects to solve this problem.

Pros and Cons of NFT Finance

Advantages of NFT Finance

Here are some of the potential advantages of NFT Finance:

  • Unlocking capital: NFT Finance allows NFT holders in need of money to mortgage their tokens for loans without having to sell their assets.
  • Encrypting Real World Assets: NFT Finance is a marketplace where Real World Assets from the real world are encoded into NFTs and then used in the Web3 marketplace.
  • Increasing liquidity for the DeFi market: The DeFi market liquidity has increased dramatically in 2021. However, all the recorded value is only cryptocurrency. NFT Finance is the driving force for real-life valuable assets to be tokenized and recorded on-chain value.
  • Attracting users from Web2: Tokenizing real assets and creating applications for those assets is the driving force for users who are not familiar with the crypto market to still be able to use Dapps for NFTs.
  • The growth of NFT Finance will create momentum for the entire DeFi market as a whole because real-world assets will help the market have more new projects in new areas.

Disadvantages of NFT Finance

Besides the advantages, NFT Finance also has some disadvantages as follows:

  • Low liquidity: The NFT market in general has fewer buyers and sellers than the DeFi market, which makes the market illiquid, especially for less popular NFT collections.
  • Price volatility: When the market has low liquidity, any buy or sell order will create high price volatility for less popular and few-holder collections.
  • Complexity: The operating model of NFT Finance projects will be more complicated for developers and users because the assets they use are unique NFTs. Therefore, the operating model of NFT AMM, NFT Fractionalization, NFT Lending will also be different from DeFi projects for tokens.
  • There are some limitations compared to tokens: For example, ETH tokens can be used as collateral and also allow the community to borrow. However, for NFTs, they can only be used as collateral to borrow ETH, but cannot borrow an NFT like a token.

Of all the above factors, low liquidity and high price volatility are the biggest barriers that make the NFT Finance market only have small players without the participation of investment funds or traditional organizations.

NFT Finance in NFT Stack

NFT Finance (NFTFi) is not a completely new segment, but it is a combination of all financial-related NFT segments, and they are all in the NFT Stack (Layers in the NFT market).

NFT Stack includes 5 industry groups respectively:

  • Blockchain Platform & Scaling Solution (Gray Box): Platform that enables ERC-721 NFTs to be created on blockchain or Layer 2 scaling solutions.
  • Infrastructure (Yellow box): This is a group of infrastructure projects that allow projects and developers to use to build projects.
  • NFT Tokenization (Red Box): This is a group of NFT encryption projects from different types of assets such as images, sounds, articles, certificates to other assets such as houses, cars…
  • Application (Blue box): These are projects that apply NFT to create financial activities, this is also a group of NFT Finance projects.
  • Portfolio Management & Interface (Orange): This is a group of interface projects for asset management or data analysis related to NFTs.

So, to learn about the arrays in NFT Finance, you need to pay attention to the group of green boxes.

The NFT Finance market includes 8 project groups and the following prominent projects:

  • NFT Marketplaces are projects that allow buying and selling of NFTs by placing orders and waiting for orders to be matched when the market has demand. Notable projects: Opensea, X2Y2, LooksRare, TofuNFT, Rarible…
  • NFT AMMs are projects that allow buying and selling of NFTs using the AMM mechanism. Notable projects: Sudoswap, Hadeswap…
  • NFT Lending are projects that allow NFTs to be mortgaged to borrow cryptocurrency. The limitation of NFT Lending is that users can only mortgage NFTs one way and cannot borrow NFTs due to their characteristics. Notable projects: BendDAO, NFTFi,…
  • NFT Liquidity Management are projects that manage liquidity based on NFTs or use NFTs to manage liquidity like Uniswap v3. Featured projects: Visor Finance…
  • NFT Fractionalization is a project that divides an NFT into many different parts to allow the community to use and invest together. Featured project: Fractional.art.
  • NFT Aggregators are projects that aggregate prices or interest rates across multiple exchanges, allowing NFT holders to maximize profits when pledging or trading NFTs.
  • NFT Launchpads are platforms that allow developers or studios to release NFTs to the community. Featured projects: MagicEden, AirNFTs, NFTB…
  • NFT Perpetual are projects that enable trading of derivative NFTs. Featured projects: NFTPerp…

In the future, the NFT Finance market may launch more projects and combine many areas together.

For example, insurance in DeFi typically only works within the DeFi Protocols to protect users from losses or risks. However, we still cannot buy insurance related to humans because of the lack of identity verification.

So, if the insurance sector can apply human identity authentication and record that unique data on NFT, the market can launch human insurance and that is also a combination of NFT Finance.